To reach a different BlackRock site directly, please update your user type.
Through BlackRock Portfolio Analysis and Solutions’ (BPAS)1 interactions with clients, successful investors stand out because of their:
In line with this, we have seen an ongoing shift to index strategies amongst investors2, with both distributors and end investors changing their perception of the role and value of index vehicles.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
At BlackRock we believe that actively evaluating your portfolio may lead to a greater role for ETFs and index funds. Download our guide to see examples of how indexing could help you build more efficient portfolios.
Constructing portfolios takes time. As the number of products increases, so does the effort required to scout the market and select the best ones.
Indexing can help to reduce the governance burden required to continually search and reassess managers; allowing you more time to focus on finding true alpha in select areas of the portfolio.
One of the keys to successful portfolio construction is understanding the risks of your investment, given that unlike returns, these can be more easily predicted and controlled.
Indexing gives you more control of your portfolio risk, reducing the potential for misalignment between the target portfolio (the strategic asset allocation or Chief Investment Officer (CIO) view) and the real, implemented portfolio.
Risk: While the investment approach described herein seeks to control risk, risk cannot be eliminated.
Increased cost transparency coupled with an improved understanding of portfolio return drivers has made indexing tools the more obvious choice for many investors.
Indexing is not only about lowering overall portfolio costs, but about finding potentially more efficient ways you can achieve similar outcomes.
Dive into our client case studies and see how indexing could help you maximise the efficiency of risk and fee budget, reduce portfolio costs and focus on finding true alpha in select areas of your portfolio.
BlackRock Portfolio Analysis and Solutions (BPAS) are a team of highly qualified investment consultants which seeks to provide industry leading tools, analysis and insights to empower our clients to make better investment decisions and gain new perspectives on portfolio construction.
Please note you will only be contacted subject to meeting certain BPAS criteria.
1BPAS (BlackRock Portfolio Analysis and Solutions) is a team of portfolio consultants which seeks to provide industry leading tools, analysis and insights for our clients. Through customised, outcome-orientated client engagements around portfolio construction and risk management, the team can assist clients with asset allocation, portfolio restructuring and implementation decisions.
2Greenwich Associates Institutional ETF Study, Feb 2019. Based on 127 responses.
MKTGQR1019E-990974
It takes time, skill and effort to determine which managers deliver true alpha, and to continually monitor and review their performance.
As the number of products available to investors increase, the cost compounds. There are currently 136,752 different funds within Europe1, a growth of 43% from 2009. There is also a large dispersion of assets under management (AUM), which suggests there is no single consistently performing manager.
Index for alpha
In reality, there is no ‘right’ choice, at least not in the long term. Based on an extensive study of 4,500 alpha managers across 21 asset classes between 1997 and 20172, BlackRock Investment Institute (BII) looked at performance persistency of alpha managers within the top quartile over 5 year periods. A meaningful persistency probability would be above 25%. Interestingly, this is only the case for a few asset classes based on the set of confidence bands. The probability highlighted that the selection of a ‘good’ manager could not be set apart from a random probability.
Research from SPIVA3 showed that few firms remain at the top over the long run. Over 5 years, only 27% US equity managers within the top quartile in 2013 remained in the top quartile in 2018. For high yield funds the figure was 28%.
In other words, to build portfolios with consistently top performing managers involves high turnover. This constant search, selection, performance assessment and reselection is a considerable governance cost that should be taken into consideration.
Investors who do not have the capacity to research and regularly monitor their alpha seeking managers may be better to consolidate the number of alpha seeking managers in their portfolio and consider greater index selection. These choices will help to make portfolio monitoring more efficient and minimise implementation, transaction and increasing governance costs.
1 Source: Morningstar, as at March 2019. The number includes share classes.
2 Source: BlackRock Investment Institute, “Blending alpha-seeking, actor and indexing strategies: a new framework”, July 2018
3 Source: S&P Persistence Scorecard, S&P Dow Jones Indices LLC, CRSP as at September 2018. High yield surveyed 144 different managers; whilst US equity managers surveyed 1988 managers.
One of the keys to successful portfolio construction is understanding the risks of your investment, because these can be more easily predicted and controlled. This goes beyond looking at product in a siloed approach but understanding the risk in the whole portfolio.
Often, portfolio construction practices separate asset allocation decisions from product choices. This assumes that by fitting products into an asset allocation, the risk of the portfolio will be controlled. In reality, two of the exact same asset allocations can have different risk profiles. For example, a 60/40 stock and bond portfolio4 based on index asset allocation, this would have 5 year annualised risk 7.2% in usd terms, while product implementation could cause this risk to vary from 3.5% to 11.5%5 (depending on the manager).
The blackrock portfolio analysis and solutions (bpas) team leverage the power of blackrock’s risk management platform, Aladdin to help clients understand the risk factor exposures within their portfolios. Through these interactions, we identify that often there is misalignment between risks, the bets that clients have stated they want to take and those they are actually taking. This can be because:
Index for control
When it comes to implementing a strategic asset allocation view on a specific market or asset class, indexing can help to control risk and reduce the misalignment between the target portfolio and the implemented portfolio. It allows investors to free up risk budget to express potentially riskier tactical views and to efficiently balance risk with the potential reward.
4 Source: 60/40 Portfolio based on 60% MSCI World Index and 40% Bloomberg Barclays Global Aggregate Bond Index. Source: BlackRock, Morningstar from April 2014 - April 2019. Assumes USD-based investor. Data frequency = Monthly. 5 Source: Analysis based on all European domiciled active managers, with a 5-year track record and benchmarked to MSCI World and Bloomberg Barclays Global Aggregate Bond Index. Source: BlackRock, Morningstar from 30 April 2014 – 30 April 2019. Assumes USD-based investor. Data frequency = Monthly.
There is more pressure than ever to reduce portfolio costs. Transparency and increased scrutiny on fees are changing revenue models, while technology is creating ‘robo’ advisers and automated offerings that deliver simple and cost-efficient solutions.
“I think costs are a huge issue – clients talk about Value for Money now, that’s something that we didn’t use to have conversations around, but it’s just because costs are under the microscope across every part of the value chain. So clients squeeze us, we squeeze managers.”
- UK Wealth Manager
There is no surprise that indexing is chosen to help lower costs. The average underlying management fees are:
Beyond this, it is also important to consider the cost efficiencies of indexing. By this we refer to the concept of strategic market and style factor tilts that account for a large portion, often more than 90%, of returns generated by traditional long only equity managers. Unless a manager can capture idiosyncratic returns in excess of their management fee, it can often be more cost efficient to implement through indexing.
This is also relevant in large fund-of-fund portfolios where there are multiple active funds - often several within the same asset class. The diversification across many managers have unintendedly cancelled out positions and the potential for idiosyncratic returns, resulting in ultimately a more expensive version of the benchmark.
Index for returns
In the end, what matters most is the returns net of fees. The latest SPIVA8 report states that, net of fees, many alpha managers can underperform if they do not express strong conviction in tilts or exposures different to the benchmark.
Indexing can be an efficient way to express strategic views and control how you tilt between asset classes and factors, whilst freeing up fee budget to invest in high octane alpha and alternatives where true alpha is more likely to be rewarded.
Overall, we see that a portfolio with greater indexing coupled with true alpha-seeking and alternative managers’ results in better returns for investors.
6 Source: BlackRock Portfolio Analysis and Solutions (BPAS) Insights. Based on portfolios received from Jan 2018 – December 2018.
7 Source: BlackRock Global Business Intelligence Report, as at April 2019. Based on ETFs listed in Europe only.
8 Source: S&P Persistence Scorecard, S&P Dow Jones Indices LLC, CRSP as at September 2018.